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Friday, 5 April 2013

Saudi Arabia sells share in Islamic finance body

Saudi Arabia’s central bank has sold its shareholding in the International Islamic Liquidity Management Corp (IILM), an unexpected blow to a body which aims to create a liquid cross-border market for Islamic financial instruments.

The decision was announced by the Kuala Lumpur-headquartered IILM late on Wednesday, in a statement which did not give a reason. IILM officials declined to comment, while officials from the Saudi central bank, the Saudi Arabian Monetary Agency (Sama), could not be reached for comment on Thursday, a holiday in their country.

One member of the IILM executive board said he was unaware of the pull-out when contacted by Reuters yesterday. “You will have to ask Sama for their reasons,” the official said.

Saudi Arabia’s stake in the IILM was bought by the central banks of Qatar and Malaysia, bringing the number of the body’s shareholders down to ten and casting doubt on the timing of its first issue of sukuk (Islamic bonds). The IILM’s statement did not reveal the purchase price.

It was not clear whether Saudi Arabia’s pull-out was prompted by management frictions at the IILM — the body changed its chief executive late last year — or by deeper disagreements over policy.

A Dubai-based managing director of a European bank said the IILM was viewed by some critics as too Malaysia-centric, adding that some countries were in greater need of Islamic liquidity management tools than others, which could be a reason for the rift.

The IILM was founded in October 2010 to address one of the main weaknesses of the fast-growing Islamic finance industry: its shortage of liquid financial instruments that banks and other firms could use to manage their funds. Instruments must be structured to obey Islam’s ban on interest.

The body’s shareholders are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the United Arab Emirates, as well as the Islamic Development Bank Group, a Jeddah-based body. Iran is a founding member but not a shareholder of the IILM.

The body intends to issue short-term sukuk in reserve currencies that can be held and traded by Islamic investors around the world. It has not yet managed to make an issue, however.

Malaysia’s central bank governor said in late March that the IILM was in the “final stages” of issuing its maiden sukuk, and was identifying underlying assets for the issue. The likely value of the sukuk was between $300mn and $500mn.

Since its inception the IILM has had to grapple with the laws of the many jurisdictions to which it wishes to cater, its chief executive at the time, Mahmoud AbuShamma, told Reuters in early October last year. AbuShamma was hired in 2011 on a three-year contract from HSBC in Dubai.

A few weeks after the interview, AbuShamma was replaced by Rifaat Ahmed Abdel Karim, former secretary-general of the Malaysia-based Islamic Financial Services Board, a standard-setting body for the global industry.

The Dubai banker said Saudi Arabian banks had relatively little need for the IILM because in recent years they had managed to shift funds from cash into other asset classes. Over the past year, sukuk issuance within Saudi Arabia has increased, providing banks with a supply of domestic instruments.

Countries with smaller or less-developed Islamic capital markets are more likely to need instruments from the IILM, and may therefore be keener to push the project forward.

One such country is Qatar, which last month said it was starting quarterly issues of sovereign sukuk in its domestic market. Qatar’s central bank governor, Sheikh Abdullah bin Saud al-Thani, is current chairman of the IILM’s governing board.

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